Credit Card Use Deepens Divide Between Consumer Groups
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What is the main topic discussed in this episode?
Here's your Money Briefing for Monday, June 22nd. I'm J.R. Whalen for The Wall Street Journal.
How is the shift from cash to cards changing who benefits financially?
We're not a cashless society yet, but more consumers are making purchases with credit cards and apps and online services instead of cash. Thing is, the rewards that often come with those forms of payment are deepening a divide between affluent and lower-income consumers.
If you're a customer who's making $200,000 a year, you're getting this 3% discount. It really adds up over time. And it's almost like it's what one economist calls a giant reverse Robin Hood effect that moves billions of dollars a year around the economy.
The rise of credit cards is also dividing large and small businesses. Our reporter Harriet Torrey will have more after the break.
As more consumers switch from cash to credit cards, small businesses and less affluent customers often find themselves facing a financial penalty. Our reporter Harriet Torrey is with us to explain. So Harriet, credit cards and online payment systems make things convenient for consumers, and they can move the line along at checkout. But how is it putting the squeeze on smaller businesses?
Well, when you buy something with a credit card, the merchant usually remits around 2% of the price to the bank that issued it. And that fee can be higher, and sometimes it's around 3% on reward credit cards. So the bank returns some of these interchange fees, they're also called swipe fees, to the cardholder in the form of rewards, including like cashback points or air miles. And these fees can really add up. So for instance, in our story, we spoke to the owner of a coffee shop in Maryland who roasts his own coffee beans, green beans. And the paradox is that last year, he spent less on beans, he spent around $12,000 on beans than he did on these interchange fees, these credit card swipe fees, which cost him around $18,000.
So that just gives you an example of the scale of this and the scale of the costs that businesses face. But because retailers' profit margins are slim, the way that it works is they usually pass on some of those fees to customers through higher prices. And you end up paying that higher price no matter how you pay. So, for instance, whether you use a credit card or a debit card or cash. And what economists say is that the result of this whole complex transaction is that there's an implicit transfer from the poor to the rich.
Why do they say that? What's the cash flow here?
Why do rewards on credit cards create a 'reverse Robin Hood' effect?
Essentially, like if you're using a reward card that gives you 3% cash back, you're paying the same price as somebody who's buying something using cash or using a prepaid credit card. But so you're essentially getting a 3% discount. And that really adds up over time. And usually the types of people who are given these who can access these rewards cards with very generous cash back and air miles and so on, are people with higher credit scores who tend to be higher income households. So if you think about it, you know, if you're a customer who's making $200,000 a year, you're getting this 3% discount. It really adds up over time. And it's almost like it's what one economist calls a giant reverse Robin Hood effect that moves billions of dollars a year around the economy.
How much do swipe fees cost small merchants compared with their expenses?
How does the type of credit card used affect the financial strain on a merchant?
For instance, if you buy something with a debit card, debit card fees are capped by the Federal Reserve at 21 cents per transaction. So, you know, let's say you go to a coffee shop, you buy a cup of coffee, you swipe your card, that's a fee of 21 cents. And then if you're paying in cash, you know, the merchant doesn't pay any fee at all. Of course, the downside for that is then the merchant has to sort of secure the cash and put it in the bank and things like that. So that's a different side of the story. But when you use a credit card, that swipe, it will result in a 3% charge to the merchant. So it very much depends. For merchants, it depends enormously on which type of card you use. That will really alter sort of the spectrum.
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Chapters
5 chapters
1
What is the main topic discussed in this episode?
0:05–0:10
2
How is the shift from cash to cards changing who benefits financially?
0:10–2:28
3
Why do rewards on credit cards create a 'reverse Robin Hood' effect?
2:28–3:11
4
How much do swipe fees cost small merchants compared with their expenses?
3:11–5:06
5
How do interchange fees and rewards affect prices for all consumers?
5:06–7:12
Speakers
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